Canadian Lawyer

w w w . C A N A D I A N L a w y e r m a g . c o m A P R I L 2 0 1 7 21 not bound by a lease if another tenant continues to pay rent but is essentially no longer in operation. Certainly, Target's abrupt departure from the Canadian market two years ago was a lesson for retail landlords and law- yers drafting leases. Toronto insolvency lawyer David Ullmann says guarantees from Target Canada's parent company in the United States made a huge difference for the landlords who managed to secure that as terms in the lease. Another important aspect was the clauses wrapped around the leasehold improvements and who ultimately owned them upon termination of the lease. With the recent demise of Grafton and Company, HMV, Danier Leather, Aeropostale, PJ's Pets and Goodwill in Canada, Ullmann, a partner at Blaney McMurtry LLP, believes retail will con- tinue to see changes. "We're still very much in the midst of this restructuring of the entire retail sector," he says. Avison Young's 2017 North America, U.K. and Germany forecast makes a similar observation, pointing to disrup- tive technologies and rising consumer debt as threats to retail. But it calls the increase in physical stores by online retailers — such as Amazon's line-free grocery store and Google's shop within some Best Buy stores — a surprise, offering an unexpected upside for land- lords of retail space. In the office market, the study out- lines uneven demand and new sup- ply bringing Canada's vacancy up to 12.5 per cent, with Calgary posting the highest at 22 per cent. And the overall industry vacancy rate hovered at 3.1 per cent. Avison Young reported record investment in office properties in Van- couver, which had a vacancy rate of 10.6 per cent in 2016. Even with new buildings coming on stream, commer- cial real estate leasing remains active, says Michael Leroux, a commercial real estate lawyer with Richards Buell Sutton LLP in Vancouver, pointing at Amazon and Microsoft, which have set up shop in the western Canadian city. He sees continued value in long- term leases for the tenants who invest in their businesses as well as tailoring the space to their needs and installing their own fixtures. Additional invest- ment tying tenants to the rented prem- ises include branding and corporate registration. But the security of space also becomes important when it comes time to sell that business. A longer-term lease with options to renew provides a sense of stability for ongoing operations for the purchaser who may consider the lease as a focal point of the transaction. "If you don't have a decent term of lease plus a significant number of renewals . . . that business is not sellable unless someone is just buying the stock and the name," says Leroux. While long-term leases are desirable for landlords, they also want flexibility to respond to changing markets and demands. Many leases, particularly in Vancouver and Toronto, now contain relocation or demolition clauses requir- ing tenants to move with six months or a year's notice. Leroux has had success pushing that clause out of the initial term into the renewal periods, provid- ing more stability for the tenant. "It makes it hard to sell a business in that context because the buyer is never going to know if it buys the business how long the business is going to be there," says Leroux. "Those clauses may never be used, but who's to know." Key for tenants thinking about sell- ing their business in the future is the assignment clause, allowing them to assign their lease to the purchaser of their business. But landlords seeking to maximize profits and exert some control over who occupies their build- ing are making them more complex, says Cameron Bryant, a Toronto-based lawyer and lease negotiator with Cirrus Consulting Group, which finds space for medical tenants, including doctors and dentists. Landlords want to see the financials of the new tenant, personal background information and details about their pro- fessional history. And they want the ability to withhold their consent. But within the assignment clause some landlords also seek "considerations" above and beyond the rent. The idea is that the landlord doesn't want the origi- nal tenant to profit from assigning the premises. But the considerations inclu- sion leaves tenants asking if it means they have to give a cut of their prac- tice to the landlord. Bryant finds that ambiguous and says he tries to carve out sale proceeds from the definition of excess consideration in the lease to make it clear that any profit tenants make from their business does not go to the landlord. "Almost every lease will have some- thing there which governs transfer of the lease," says Bryant, whose clients eventually do want to sell their business or practice. "We definitely want to lay down the rules for that." Death and disability clauses have also become important to medical pro- fessionals. They will lay out what hap- pens following the unexpected death or disability of the tenant holder. Often, that will allow their family members to get out of the lease if they have no suc- cess in finding another professional to take over the practice and assigning the lease to a new owner after six months. With so many different pressures on both landlords and tenants, Michael Kennedy, a commercial lawyer with Patterson Law in Halifax, says leases have become much more detailed and complex than they were even a decade ago. And, he adds, they can be incred- ibly flexible to adapt to changing needs. The tenant, responding to ever- changing market conditions, may search for the right to terminate or downsize through the lease. On the other side of the spectrum, they may Leases for commercial real estate are becoming more detailed and complex. These clauses are appearing more frequently in long-term leases: • Security from the tenant's parent company; • Multiple options to renew; • Co-tenancy and go-dark arrangements; • Assignment, to allow the purchaser of the business to assume the lease; • Relocation and demolition clauses; • Death and disability clauses. Commercial leases

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